At a grimy shipyard along the San Diego waterfront, the Navy cut an unusual deal on April 12, 1989, that lifted an onerous financial burden from the shoulders of a major defense contractor. By the end of that day, the taxpayers were left footing the bill. The beneficiary was Morrison Knudsen Corp., which in 1987 had promised to build the Navy four advanced supply ships--known as AOE-6s--for $863 million at its National Steel and Shipbuilding Co. in San Diego.

Two years ago--amid allegations of fraud, headlines about slush funds and congressional hearings into $600 toilet seats--the nation's largest defense contractors sought to salvage their image and stave off tighter government oversight by pledging to police their own ranks. Forty-six defense giants signed onto a "Defense Industry Initiative," promising to adopt codes of ethics, train their workers in ethical conduct and encourage whistle-blowing without fear of retribution.

A series of cases in which TRW overcharged the government on military work has prompted a high-level Pentagon review that could lead to the firm being suspended from obtaining new defense contracts. The Defense Logistics Agency, a contracting arm of the Defense Department, has assigned a review of TRW to its contracting integrity division, which has the authority to suspend a contractor for ethical violations, The Times has learned.

The final report on the Pentagon's Tailhook investigation, expected to be released later this month, alleges an assortment of sex acts by Navy officers that go beyond grabbing and fondling female aviators and expands the potential targets for prosecution and discipline. In confidential memoranda expected to accompany the long-awaited report, the Defense Department's inspector general, Derek J.

Nineteen Marine Corps officers are facing discipline in the Tailhook affair, but only one stands accused of criminal assault after a lengthy Pentagon investigation that uncovered 83 alleged attacks on women, according to a legal memorandum about the controversy. The Marine Corps intends to discipline many, if not all, of the Marines implicated in the scandal, forcing the senior-most into retirement while slapping the junior officers with reprimands and $1,000 fines.

Forcing some old-fashioned competition on the defense industry seemed like the perfect solution to the Pentagon's longtime problem of weapons that cost too much and don't work the way they're supposed to. But the government's bright idea has turned into a mess. And now, top Pentagon leaders are trying to scale back competition in the defense industry, acknowledging that it's hard to tell whether competition has saved or lost money.

John Power, who runs a small Southern California defense factory, has seen the military spending boom create new business opportunities in his industry--but not all of the type that the Pentagon has in mind. Crooked purchasing agents at major aerospace firms have established their own growth industry, Power said, one based on taking cash kickbacks and expensive gratuities in exchange for awarding Pentagon subcontracts.

Following are excerpts from the report by Derek J. Vander Schaaf, the Defense Department's inspector general, on the Tailhook incident: In this report, we have attempted to describe the events that occurred at the 35th Annual Symposium of the Tailhook Assn. (Tailhook '91) in as complete a manner as possible. We determined that at least 90 indecent assaults took place and a considerable amount of improper and indecent conduct occurred.

The crash of a DC-10 jetliner last summer in Sioux City, Iowa, which killed 112 people and miraculously spared 184, was ordained 18 years earlier. In 1971, a titanium disk was installed in a General Electric jet engine, which was later mounted onto the DC-10. But the disk had a flaw, one that would go undetected in one inspection test after another.

The Defense Department, releasing the results of a seven-month investigation Friday, accused about 140 Navy and Marine Corps officers of sexual assaults or other misconduct in connection with the infamous Tailhook convention of 1991 and charged that the behavior stemmed from "a serious breakdown of leadership." The report methodically chronicled a rowdy three-day party at which 97 sexual assaults and a host of lesser offenses occurred.